6 Steps to Deduct an IRA Loss | Ed Slott and Company, LLC

6 Steps to Deduct an IRA Loss

By Beverly DeVeny, Chief IRA Analyst
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Can you deduct a loss in your IRA or Roth IRA? The answer is yes, if you meet the criteria. It is much easier to deduct a loss in a Roth IRA than in a traditional IRA because Roth IRAs generally hold more basis than a traditional IRA. Basis in a traditional IRA comes only from nondeductible contributions and/or rollovers of after-tax funds previously held in an employer plan. Basis in a Roth IRA comes from Roth IRA contributions, Roth IRA conversions and most rollovers from designated Roth accounts (i.e. Roth 401(k) funds). Here are the six steps.

  1. You must have basis in your IRAs or Roth IRAs. Roth IRAs will have more basis because all contributions and conversions to a Roth IRA consist of after-tax funds, though claiming a deduction for a Roth IRA loss is not so simple.
     
  2. All funds in all IRAs must be withdrawn. For a traditional IRA, this means that all funds in all IRAs, including SEP and SIMPLE IRAs must be withdrawn. For a Roth IRA, all funds in all Roth IRAs must be withdrawn.
     
  3. The amount of the basis must exceed the amount withdrawn.

    Example 1: Travis has $10,000 of basis in his IRA. His IRA has suffered severe losses during the year, but still has an account value of $30,000. Travis cannot deduct his IRA losses because his basis ($10,000) does not exceed his account value ($30,000).

    Example 2: Brenda has $100,000 of basis in her only Roth IRA. Her Roth IRA has suffered severe losses during the year and now has an account value of $30,000. If Brenda takes a distribution of $30,000 from her Roth IRA, she will have a loss of $70,000 that she may be able to deduct.

  4. You must itemize deductions on your federal income tax return. The IRA loss is a miscellaneous itemized deduction. You cannot take the standard deduction.
     
  5. The total of all of your miscellaneous itemized deductions must exceed 2% of your adjusted gross income (AGI). The total will include the IRA loss. You could still lose part of your deduction due to the 3% overall limit based on your income.
     
  6. You must not be subject to the alternative minimum tax (AMT). The deduction for the IRA loss is wiped out if you are subject to AMT.

For those under age 59 ½, there is an additional pitfall to stay away from. You could be subject to the 10% early distribution penalty if you withdraw amounts converted to a Roth IRA within five years of the conversion.

As you can see, it is not all that easy to deduct an IRA loss. This is the only way to deduct IRA losses. Investment losses within the IRA cannot be deducted.

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